The Importance of Small Business Contracts

Posted on: April 4, 2013

In the words of Virgin Records/Virgin Mobile/Virgin Atlantic mogul Richard Branson: “By all means, shake hands on a deal, but then make sure to ask your lawyers to record the details. It could be the best bill you ever pay!”

A business contract is a legal document that acts as an agreement between two parties. For small businesses, the contract can be between the business and its customers or clients, or a contract between vendors. Verbal agreements — and handshake agreements — are common in many industries, but the best chance of having the agreement holding up against possible legal action is by having a contract in writing that has been signed by both parties. A contract can also be enforced in a legal or court setting as long as attorneys and the judge have determined it to be a legal and binding contract, and was signed before the event in question took place.

Why is a Contract Signed?

There are a number of reasons why a small business will need a signed contract, which typically centers around the production, delivery, and receipt of goods and/or services. Some contracts are for protection though, such as non-disclosure agreements (NDA) and non-compete agreements. However, contracts, in practically any form, are a way of protecting the terms and to be used if one party doesn’t perform the services or abide by the terms they agreed on.

Receiving Payment

One of the more important reasons a small business should utilize contracts is to ensure payment of goods and/or services. Simply sending an invoice to a client isn’t always enough to guarantee payment. However, if a legal document is signed, the client is legally required to provide payment for services. Furthermore, if fees and penalties are part of a contract’s non-payment stipulations, there’s more likelihood that payment will be made on time. If as a business, you don’t get your payment on time, you can use the contract to open legal actions.

Service Contracts

If you provide certain services as part of your business, such as remodeling work for client’s homes, then a service contract is extremely important. Not only does it offer payment protection, but it offers a promise on both sides of the contract. A number of things could come up after the work is agreed upon that the contract could protect. You are listing the type of services and what date they will be performed, so if the client requests additional work not outlined in the contract, you can deny the work or ask for additional payments. On the flip side, your client will feel more protected as you are promising to complete the work as assigned.

Tips for Small Business Contracts

While it’s always wise to consult with an attorney when crafting or signing a contract, there are other important tips of small business contracts.

Ask for clarification. If something is unclear or is ambiguous to you, ask questions until you understand the terms of the agreement.

Include all pertinent information, including payment types and amounts, the date of the contract and dates the services will be rendered, what services you are agreeing to, and any information about late fees or consequences if either party goes against the contract.

If you decide to use contract templates — and their are a host available online — be sure to have it reviewed by an attorney.

Each party should read through and sign the contract.

Determine what remedies the contract includes in case either party breaches the contract.

While this was said before, it is worth saying again: seek legal advice before entering into a binding contract, particularly if you aren’t sure how to proceed with writing the contract.

As important is business insurance is for the protection of your financial assets, contracts are another tool that are imperative to use to safeguard your business assets.